In 2023, private equity, mergers and acquisitions and venture capital financings have experienced a slowdown across Canada, on the heels of a historically strong year in 2022. In this post we look specifically at the province of Québec, which has not escaped this broader trend, but whose bright spots remain resilient, boding well for 2024 and beyond.
Deal Flow in H1 2023
In Québec, as in most other Canadian provinces, the number of transactions and capital investments declined in Q1 2023 compared to the previous year. Though there appears to have been an uptick in deal flow in Q2 2023, inflation, rising interest rates and geopolitical events – as well as reverberations from U.S. regional bank failures – continue to affect transactional activity and financing availability.
Bright Spots
The overall picture, however, is not all negative. There are some bright spots.
Québec’s venture capital market
Québec’s venture capital market saw notable financing rounds and remained active in Q1 2023, despite market headwinds and an overall decline in activity. Québec-based institutional investors have continued to invest in home-grown companies. Within the province, Montréal continues to have the largest network of emerging companies and venture capital investors.
Montréal continues to develop as a global hub for AI research
The province of Québec remains at the forefront of artificial intelligence research and development. Montréal’s particularly robust ecosystem, influenced by the city’s universities and research centres, is a bright spot that continues to attract investment in academic research and private companies. As AI grows in importance politically, economically and socially, so too does the conversation around its governance and purpose. Quebecers are among the thought leaders in many aspects of AI – one example being its potential application to healthcare, as discussed in a recent article Danielle Miller Olofsson of Stikeman Elliott.
Capital Raising
Venture capital
While Québec’s venture capital market is a bright spot, raising capital in current market conditions has proven challenging for some companies as rising interest rates have resulted in increased borrowing costs. One consequence is that down-round equity financings – where the pre-money valuation of a company is below the post-money valuation of a previous financing round – have become a more palatable and necessary means for raising venture capital.
Midmarket trends
The midmarket saw a dip in valuations in 2022 compared to 2021. Whether valuations rebound will be closely watched by the market through the remainder of 2023. Midmarket companies with proven track records and strong financials also appear to be continuing to attract investors while – as might be expected – smaller or newer companies are finding it increasingly difficult to raise capital. Though this will inevitably require some companies to consider insolvency/restructuring options, rising borrowing costs may also present opportunities for strategic acquirors that could prompt an increase in the number of transactions in the lower midmarket
For further discussion, see “Episode 88 – The Midmarket at Mid-Year: How 2023 Is Shaping Up” and other recent episodes of the Views from the Market: Midmarket M&A and Private Equity podcast, hosted by Stikeman Elliott’s Mario Nigro and featuring guests with a wide range of perspectives on the Canadian midmarket.
Exits
Though there may now be some potential signs of life, the IPO market largely remained dormant during H1 2023, continuing a trend that emerged in 2022. The typical alternative to an IPO for shareholders seeking an exit is through an acquisition of their company. M&A activity resulting from succession planning, particularly amongst small- and medium-sized, privately-owned enterprises, as well as from well-capitalized midmarket companies looking for strategic acquisitions, continues to be a source of transactions in the current environment.
The phenomenon of companies with strong balance sheets acquiring smaller companies has not been limited to the private markets. In H1 2023, there have been some notable going-private transactions in Canada, including in the biopharmaceutical space.
Recent Legislative Changes in Québec
As Québec-based companies dealt with market factors, new legislative requirements came into force in H1 2023, notably the new corporate transparency requirements of Bill 78, and the new French-language requirements of Bill 96.
Bill 78 (An Act mainly to improve the transparency of enterprises) came into force on March 31, 2023, introducing significant corporate transparency requirements to the Act respecting the legal publicity of enterprises. Although transparency initiatives have been adopted in other provinces and at the federal level, Québec is the first Canadian jurisdiction to make corporate and other ultimate beneficiary information publicly accessible. For example, the new rules require companies registered in Québec to obtain and file information regarding the individuals ultimately behind their investors when certain thresholds are met, such that affected companies may wish to discuss these requirements with any new investors at the outset. For more detail, please see our blog post on this topic.
More recently, on June 1, 2023, amendments to Bill 96 (An Act respecting French, the official and common language of Québec) took effect, introducing, amongst other things, new rules applying to adhesion (standard form) contracts and filing requirements under the Act respecting the legal publicity of enterprises. In the latter case, enterprises employing between five and 49 people must disclose in their declaration to the REQ (Québec's enterprise register) the proportion of employees who are unable to perform their work in French. Obtaining this information has become a closing or post-closing action item for purchasers in acquisitions affecting Québec-based targets. For more detail on the amendments to Bill 96, please see our blog post on this topic.
